Like nature's changing seasons, earnings season for the S&P 500 is turning from long hard Winter to a promising Spring. If current profit growth holds, it would mark the first time S&P 500 aggregate earnings have grown for two consecutive quarters in almost two years.
The Earnings Outlook is Looking Up
#Earnings #Recession SPY
The profit recession is over. Earnings turned south in the second quarter of 2016. Profits declined for five straight quarters, a streak not seen since the dark days of 2009.
This stands in stark contrast to numbers being reported for the fourth quarter of 2016. As you can see in the Chart of the Day below, as of last night, 283 of 500 S&P 500 companies have reported year-over-year sales and earnings growth of +4.3% and +5.9% respectively.
As Hedgeye CEO Keith McCullough notes in this morning's Early Look, "These are the highest aggregate growth rates we’ve seen during Earnings Season."
Digging into the sectors:
- Basic Materials: 16 of 25 companies have reported aggregate SALES and EARNINGS growth of +6.1% and +7.6%
- Technology: 43 of 66 companies have reported aggregate SALES and EARNINGS growth of +7.0% and +9.3%
- Financials: 52 of 63 companies have reported aggregate SALES and EARNINGS growth of +5.1% and 10.6%
"All 3 of these sectors fit our Quad2 (growth and inflation accelerating) asset allocation for Q4 of 2016," McCullough writes. (Click here to read a brief recap of our U.S. economic outlook.)
Sector Performance
XLK XLB XLF
Unsurprisingly, besides Financials, these growth and inflation-oriented sectors are outperforming the S&P 500's +2.4% rise year-to-date:
- Technology (XLK): +4.9% (the #1 sector performer in 2017 out of nine)
- Basic Materials (XLB): +4.5% (#2 in performance)
- Financials (XLF) are lagging the broader index, up just +1.5% and beating out only the Utilities and Energy sectors
Expect outperformance from these sectors in the quarters to come as they heat up along with the broader U.S. economy.
Bottom Line
It's worth reflecting on just how bad earnings were this time last year. In the first quarter of 2016, year-over-year earnings growth in Basic Materials, Tech, and Financials were down between -7% and -16%. Negative growth extended into the second quarter of 2016 too.
In other words, over the coming quarters companies in the S&P 500 are more likely to post year-over-year profit growth (as they compare against last year's bombed out numbers). "That’s right. You remember now. At this time last year, there were plenty of reasons for stocks and their respective sectors to be in crash mode," McCullough writes.
As we head into Spring, it's fitting that we're just now beginning to see signs of life from corporate America. Stay positioned for more earnings season growth in the months ahead.
